Break Up the Banks - Too Big, Too Powerful, Too Risky

The calls for banking reform are growing. About time. The big crash was more than five years ago. Since then we've had Libor rate-fixing, bonuses for failed financiers and massive fines for malpractices by leading banks. Plus mis-sold PPI, interest rate swaps, fraud, money-laundering and tax dodging. Scandal after scandal.

What's even more astonishing is that the gamblers and fraudsters in the City of London not only got away with their shenanigans, they were bailed out of the mess they created by the taxpayer. They won, even when they failed.

Are we mugs or masochists? Why do we put up with it? The rot has got to stop. The Bank of England and the Financial Conduct Authority are not up to the job. Many people see them as agents of corporate power. Their light-touch regulation allowed speculators to play fast and loose with the whole British economy.

We propose three simple ideas to stabilise the financial system: put a limit on the size of banks, reduce borrowing ratios and mutualise ownership.

A few megabanks are holding society hostage, reaping huge profits on the back of the state, despite their failings. By threatening bankruptcy, the big banks extract public support worth tens of billions of pounds each year. The bail outs have siphoned off public money that could have been spent on health, education, job creation and better pensions.

Megabanks have the taxpayer over a barrel. They're drinking the bar dry and putting it on our tab.

Over the past 30 years, the big banks have grown bigger, riskier and fewer. Through incestuous "intra-financial" lending sprees, they've become wired to one another like a string of exploding fairy lights. If one bank goes down, there's a risk that they all will.

The megabanks are a clear and ongoing threat to society.

Now Justin Welby, the new Archbishop of Canterbury, has challenged George Osborne:

"You continue to defend the idea of a small group of absolutely colossal banks... Is that lack of will to break them up not simply a recipe for a repetition of disasters?"

He's right. We need to end bank risk and welfare. Here's how.

Britain suffers under the financial stranglehold exercised a few very rich and powerful megabanks. They're unwieldy, over-complex and cannot be safely managed.

The solution: Cap bank size at $100 billion. Smaller banks are easier to manage and internal accountability can be stronger. Checks and balances tend to be more effective. With many smaller diverse banks, if one or two fail the impact on the economy will be less severe.

Megabanks borrow a lot and own little. With the government and public beholden to them because of the fear of what would happen if they were allowed to fail, bankers extort government handouts whenever they get into trouble because of their reckless policies.

George Osborne would let banks borrow 33 times what they own outright. How irresponsible is that? No one would expect to get a mortgage worth 33 times their deposit. It's far too much and too risky. So why should banks be allowed such astronomical borrowing ratios?

A sensible precaution would be to cap bank borrowing at around 14 times their net worth

Most of our banks are run for the benefit of a very small, privileged group of people - their major shareholders - who always have the option to get out while the going's good.

This drives banks to be permanently seeking profit maximisation, often regardless of the cost to their own organisations - never mind the wider society.

Many French and German banks are run differently - as mutuals or in public ownership for the benefit of the customers and the common good. Why not ours?

Mutualisation would establish a stronger ethos of public service and accountability; removing from banks the pressure to put the optimisation of shareholder's gain as their sole priority. This would, in turn, make possible a greater sense of civic responsibility in banking operations.

These proposals are all about creating a culture of safer, responsible banking, with checks and balances to thwart, or at least minimise, a possible repeat of the 2007-08 meltdown.

Richard Paton from Occupy Economics puts it this way:

"Why are those who are brave, or honest, enough to challenge the megabanks either Archbishops or technocrats?

"Public revulsion at the banks won't be assuaged by superficial measures. The underlying 'conduct issue' is that a few megabanks are able to extort profits by imperilling the solvency of the state.

"No-one seriously engaged with the issue believes the problem has been dealt with - except bank execs and the Chancellor.

"The government is in denial, determined to frame the problem as one of the 'culture' of wayward banks. Trying to address 'culture' alone is forlorn, like trying to catch a vapour in a butterfly net.

"The banking crash was driven by blind stock market pressure for 'shareholder value' in a sector dominated by predatory plcs. These megabanks still have their finger on the nuclear button known as Too Big - and too interconnected - To Fail."